EBRI Webinar Examines Impact of Tenure on Retirement Savings

On April 10th, the Employee Benefit Research Institute (EBRI) featured the webinar EBriefing: Trends in Employee Tenure, showcasing the latest EBRI research examining broad employee tenure trends over time, and the impact that shorter tenure can have on retirement savings.

Copeland’s presentation immediately dispelled two commonly-held myths regarding employee tenure: 1) that a large percentage of individuals hold a “career job” and 2) that tenure tends to be shorter when the labor market is weakest.

Copeland’s data also revealed two important findings linking tenure to retirement savings:

Account balance size is strongly correlated to tenure. The EBRI/ICI 401(k) Plan Database reveals that 28% of active participants with a balance less than $5,000 in 2012 were not in the same plan in 2013, whereas that figure dropped to 21% for participants with a balance between $5,000-$9,999 and to 17% for those with balances $20,000 or more.

The average and median balances of “consistent 401(k) plan participants” – which includes participation across retirement plans – were significantly higher than the values for all participants.

Copeland summarized the impact of shorter tenure on retirement as follows:

Shorter tenure equals more turnover and more jobs during workers’ careers

More turnover results in an increased incidence of cashout leakage

If retirement savings are stranded in a prior plan, coordination with new plan savings may not occur

Continuous participation in a plan has a large impact on the resulting savings amounts

Making the case for synthetic tenure, Williams presented composite cashout leakage statistics, indicating that the preponderance of today’s cashout leakage occurs for job-changing participants with plan account balances less than $5,000.

Next, applying EBRI tenure data, Williams illustrated two scenarios for a 25-34 year-old participant, whose average tenure is less than 3 years, and will likely have 3 jobs during that period in their life.

Without portability, the hypothetical participant will likely cash out two of their three small-balance retirement accounts and leave the third stranded with their prior employer, resulting in $13,300 in retirement savings at age 65.

With portability, the average participant would likely preserve those three balances, rolling them forward into their new employer’s plan. By contrast, they would have a $75,900 balance at retirement, an amount which would simulate the outcomes of the higher-tenured, consistent participation population.

Figure One: Synthetic Tenure Illustration

Once again referencing EBRI research, Williams noted that in 2017, EBRI estimated that system-wide auto portability would dramatically reduce leakage for small accounts, preserving more than $1.5 trillion in the retirement savings, in today’s dollars.

In closing, Williams also noted that auto portability, once adopted, could lead to a dramatic reduction in the incidence of missing participants by 1) consolidating accounts as participants change jobs and 2) providing a source of more-reliable current address information, when a participant’s current-employer’s plan can be located and accessed for address information.

Individuals should consult their tax advisers or legal counsel for advice and information concerning their particular situation. Retirement Clearinghouse does not give legal, investment, or tax advice. IRA account fees and product information provided by Retirement Clearinghouse, LLC is subject to change without notice at the discretion of the IRA Provider. Securities are offered through RCH Securities, LLC, a wholly owned subsidiary of Retirement Clearinghouse, LLC and a member of FINRA (www.finra.org). RCH Shareholder Services is a wholly owned subsidiary of Retirement Clearinghouse, LLC and a registered transfer agent with the U.S. Securities and Exchange Commission.